Learning Objectives: Quick answer key: Question # Multiple Choice True/False Describe the important of accounting and financial information.

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2 Learning Objectives: 14.1 Describe the important of accounting and financial information Differentiate between managerial and financial accounting Identify the six steps of the accounting cycle Explain the purpose of the three key financial statements Describe the short and long-term financing options available to businesses Discuss the use of ratio analysis to evaluate organizational performance. Quick answer key: Question # Multiple Choice True/False 1 C True 2 B False 3 A False 4 D True 5 B True 6 C False 7 C True 8 A False 9 B False 10 C True 11 A True 1

3 12 C False 13 C True 14 B False 15 B True 16 A True 17 D False 18 B False 19 C True 20 D False 21 B True 22 A False 23 A False 24 B True 25 B True 26 D False 2

4 Multiple Choice Questions: 1. How do first level managers use accounting and financial information? A) to summarize financial transactions B) to manage the accounting function C) to make decisions and evaluate operational performance D) to make financial investments Learning Objective 14.1 Answer C 2. Which is true of managerial and financial accounting? A) managerial is performed by managers; financial is performed by finance B) managerial is used by insiders and financial is used by outsiders C) managerial is organization-wide; financial is department-wide D) managerial is monthly; financial is annual Answer A 3. How does a bookkeeper differ from an accountant? A) a bookkeeper records transactions; an account classifies data according to accounting standards and principles B) a bookkeeper records and classifies data; an accountant prepares financial statements C) a bookkeeper assembles source documents; an accountant records and classifies data D) a bookkeeper classifies data; an accountant records data Answer A 3

5 4. Which is a financial statement that reports and organization s financial condition as of a specific date? A) income statement B) statement of cash flows C) statement of owners equity D) balance sheet Answer D 5. Which statement best describes debits and credits? A) debits are recorded on the right and credits are recorded on the left B) debits add value to an account and credits remove value from an account C) debits are assets and credits are liabilities D) debits are journal entries and credits are ledger entries Answer B 6. Which of the following are revenues? A) payroll, taxes, and insurance B) depreciation, rent and utilities C) sales, interest, and service fees D) supplies, advertising, and salaries Answer C 7. Which is a measure of liquidity? A) total assets B) retained earnings C) working capital D) current liabilities Answer C 4

6 8. What financial concept is used to determine the feasibility of an investment decision by computing the present value of future cash flows? A) time value of money B) cost of capital C) financial ratios D) liquidity Answer A 9. Which is one of the most convenient and least expensive forms of short-term borrowing for a business? A) credit cards B) trade credit C) secured loan D) factoring Learning Objective 14.5 Answer B 10. How do managers use financial ratios? A) to validate a company s financial statements B) to verify the accuracy of accounting data C) to evaluate organizational performance D) to set financial objectives for the organization Answer C 11. The daily inflow of funds to an organization is known as? A) accounts receivable B) accounts payable C) current assets D) current liabilities Answer A 5

7 12. Which term best describes the activities of buying and selling goods, paying bills, and purchasing supplies? A) financial accounting B) financial statements C) financial transactions D) financial analysis Answer C 13. Which statement most accurately describes an annual report? A) it is a financial document for internal use only B) it is a financial document for external use only C) it discloses the financial condition, progress and expectations of an organization D) it summarizes the budget expenditures of an organization Answer C 14. In accounting, a value added to an account is called? A) owner s equity B) a debit C) liability D) a credit Answer B 6

8 15. Which financial statement would be the best one to use to evaluate the investment potential of an organization? A) statement of cash flows B) income statement C) trial balance D) balance sheet Answer B 16. Which financial statement analyzes changes in an organization s cash for a stated period of time to determine the organization s net cash position? A) statement of cash flows B) income statement C) trial balance D) balance sheet Answer A 17. Which term best represents what a business owns? A) cash B) inventory C) liabilities D) assets Answer D 18. The accounting equation is the basis for preparing which financial statement? A) income statement B) balance sheet C) statement of cash flows D) retained earnings statement Answer B 7

9 19. If gross sales = $500,000, sales returns = $10,000, and sales discounts = $5,000, what are net sales? A) $495,000 B) $490,000 C) $485,000 D) $515,000 Answer C 20. What is the first step in the accounting cycle? A) prepare financial statements B) analyze financial statements C) record transactions in journals D) analyze source documents Learning Objective 14.3 Answer D 21. What is the last step in the accounting cycle? A) prepare financial statements B) analyze financial statement C) record transactions in journals D) analyze source documents Learning Objective 14.3 Answer B 22. Which equation best represents gross profit? A) net sales less cost of goods sold B) gross sales less inventory C) revenues less expenses D) assets less liabilities Answer A 8

10 23. What differentiates current assets from long term assets? A) current assets can be converted to cash in less than a year and long term assets can be converted to ash in a year or more B) current assets can be converted to cash in less than a year and long term assets can be converted to cash in 5 years or more C) current assets can be converted to cash in less than 5 years and long term assets can be converted to cash in 5 years or more D) current assets are cash and long term assets are equipment Answer A 24. What is an intangible asset? A) items that are permanent, such as land and buildings B) items of value that don t have a physical form, such as copyrights C) items that have a useful life of more than 5 years D) items that can be depreciated, such as equipment Answer B 25. Why is money received today worth more than money received in the future? A) global economics causes money to lose value over time B) money can be invested today and earn interest C) the discount rate depreciates money over time D) because net present value is always greater than net future value Answer B 9

11 26. When assessing an investment decision, what does the capitalization rate tell a manger? A) cap rate tells the value of an investment B) cap rate tells the useful life of an investment C) cap rate tells the salvage value of an investment at the end of its life D) cap rate ells how fast the investment will pay for itself Answer D 10

12 True/false Questions: 1. Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions in an organization. Learning Objective Managerial accounting provides information and analysis for use outside an organization by stakeholders. 3. Financial Accounting Standards Principles (FASP) are followed by US accountants to record and report financial information. 4. A debit is a value added to an account while a credit is a value removed from it. 5. The five classifications of financial accounts are assets, liabilities, equity, income and expenses. 11

13 6. Depreciation is the systematic write-off of the cost of a tangible asset over the course of a year. 7. Cost of goods sold (CGS) represents the cost of merchandise used to generate sales or the raw materials used to produce goods for sale, including freight and storage charges. 8. Net income is determined by subtracting revenues from gross profit. 9. Assets are what a business owes to others (debts). 10. Accounts receivable are monies owed to an organization by customers for credit sales. 11. The second step in the accounting cycle is to record transactions in journals. Learning Objective An accountant is an individual who records financial transactions for a business. Learning Objective

14 13. A financial statement is a summary of financial transactions that have occurred over a period of time. 14. Statement of cash flows is a financial statement that reports a firm s financial conditions at a specific time. 15. An income statement is often referred to as the profit and loss statement. 16. Time value of money is the concept that money received today is worth more than money received in the future. 17. Present value rate is the minimum rate of return used in calculations of the time value of money. 18. Discount rate is the return on investment at a certain point in time. 13

15 19. Trade credit is a form of short-term borrowing where goods received today are paid for in 30 or 45 days. Learning Objective A secured loan is a loan that doesn t require any collateral. Learning Objective Factoring is the process of selling accounts receivable for cash. Learning Objective Debt financing is money raised from within the firm, from operations or through sales of ownership in the firm. Learning Objective Current ratio is a measure of an organization s financial security to repay short-term debt from cash, marketable securities, and accounts receivables. 24. The debt to equity ratio is a measure of long term liquidity that compares an organization s debt to equity. 14

16 25. Net profit margin is a measure of performance that represents net profits relative to sales. 26. Return on equity is a measure of performance that represents the profit earned by a company for each share of common stock outstanding. 15

17 Short Answer questions: 1. Explain the difference between managerial accounting and financial accounting. Answer Managerial accounting provides information and analysis to managers to assist them in decision making and evaluating organizational performance. Financial accounting generates information about the financial health of an organization for use outside of the organization. 2. What are the five classifications of financial accounts? Answer The five classifications of financial accounts are assets, liabilities, equity, income and expenses. 3. What are the six steps of the accounting cycle? Answer The six steps to the accounting cycle are: 1) Analyze source documents 2) Record transactions in journals 3) Transfer journal entries to ledger 4) Take a trial balance 5) Prepare financial statements 6) Analyze financial statements 4. Identify and list two short-term and two long-term borrowing sources for businesses. Answer Applicants answers will vary, but could include: Short-Term Sources trade credit, secured loan, unsecured loan, line of credit, factoring. Long-Term Sources debt financing, equity financing, leverage, cost of capital 16

18 5. Explain the difference between liquidity, debt, profitability, and activity ratios. Answer - Liquidity ratios measure an organization s ability to turn assets into cash to pay its short-term debts or liabilities. Debt ratios measure the degree to which an organization relies on borrowed funds in its operations. Profitability ratios measure how effectively an organization s managers are using resources to achieve profits. Activity ratios show how effectively management is turning over inventory and assets in order to produce revenue. 17

* * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

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